Cash value life insurance has a questionable reputation because the cost can be high and the benefits are typically very misunderstood. When we think about how to prioritize someone’s savings, cash value life insurance can be a great “life insurance” vehicle, but is not our first option for “investment” vehicles. The reason is because cash value life insurance tends to return 4-5% per year over a very long period of time vs. the stock market returning 8-9% per year. These few percentage points make a MASSIVE difference after 30-40 years of compounding.

That being said, for clients who have maxed out their easy tax-deferred or tax-free investment options such as 401(k)s and Traditional/Roth IRAs, cash value life insurance becomes a very interesting investment vehicle.

The first reason is because it has no volatility. These policies accrue at 4-5% per year every year and never go down in value unless you take money out or don’t pay your premiums. Because there is no volatility, this provides great ballast to your portfolio of stocks which can have significant volatility.

Secondly, money can be taken out of these policies tax-free through policy loans. These tax-free withdrawals can be used for income in retirement, to pay for kids’ college, or any other purpose you may have for them later in life. Therefore, these policies are tax-efficient savings vehicles comparable to a Roth IRA.

Lastly, while the policies return 4-5% per year while you are alive, they also have a death benefit associated with them. Meaning, if you die, a large lump sum will be paid to your beneficiaries. Therefore, 4-5% assumes you are living, but if you die early the returns can be substantially better. This provides clients and their spouses reassurance that their money will take care of the family if something happens.

So, while cash value life insurance isn’t right for everyone, it does have benefits for those who don’t want volatility, want tax-free growth and want to provide protection to their families in the event something happens to them. For higher net worth families, we typically recommend 5-10% of your net worth be in cash value life insurance.

If you want to learn more about how cash value life insurance works, please reach out to our team.

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Fortis Capital Management LLC (“Fortis”) is registered as an investment adviser in Washington, California and Texas. Numerous Fortis clients reside in other states in which Fortis is exempt from registration. Fortis will not provide investment advice for compensation or affect transactions in securities in any state in which it is not registered or exempt from registration.